INFORMED SOURCES

As goes Delphi...

The following editorial appeared yesterday in London’s Financial Times. When a company’s assets fail to match its liabilities, it faces problems. By that measure, the entire U. S. automotive industry is in trouble. Not only does it pay its workers far more than overseas competitors but it cannot afford the healthcare and pension benefits to which a generation of Detroit employees has become accustomed.

But the woes of Detroit, which bear a dismal resemblance to those of the U.S. airline industry — and the steel industry before that — are not only a matter for concern for the industry itself. They also pose a looming threat to those public institutions — the Pension Benefit Guaranty Corporation and Medicare — that fill the gap when private sector institutions do not provide.

By filing for bankruptcy this weekend, the auto parts manufacturer Delphi brought the crisis uncomfortably close to Detroit’s manufacturers. Delphi was spun off from General Motors in 1999 and GM is still liable if Delphi’s workers lose retirement benefits. Delphi, GM and the UAW auto workers’ union face a tough three-way tussle to restructure the company.

Steve Miller, Delphi’s chief executive, does not mince his words in describing the crisis afflicting his company. He says it can no longer afford to pay its manual workers so much or allow many to retire early after 30 years of employment. “ We are witnessing the slow, agonizing death of defined benefits as industrial compensation policy,” Mr. Miller warned yesterday.

It would be nice to dismiss Mr. Miller’s prophecy as tough talk intended to scare Delphi’s unions. But when he insists that Delphi’s workers have to accept wage cuts if they want its pension plan to remain solvent, he is speaking the unpalatable truth. Delphi employees can no longer rely on their employer to take care of them in sickness and retirement.

U. S. companies cannot be absolved of responsibility for such difficulties. Many allowed their pension schemes to become underfunded during the 1990s when actuarial assumptions were overoptimistic. But a lot of the agony is due to factors beyond their control: rising health care costs and global competition from low-wage countries.

The U.S. is starting to wake up to the public policy implications. In the 20th century, it relied on the private sector to fund health and pension provision. But single-employer pension plans are now underfunded by US$450-billon and health care is a growing burden. Companies, employees and the federal government must somehow find a way to bridge this funding gap.

There has been little progress so far. The government’s effort to change private sector pension rules is stalled in Congress because some senators are unhappy that companies with poor credit ratings would have to make higher contributions. But tough action, even if it involves some pain, is better than storing up trouble. Just ask Delphi’s workers about that.